Eurex to launch variance futures based on EURO STOXX 50

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Eurex is set to extend its product range by introducing a listed variance future on 22 September 2014, based on the EURO STOXX 50, the most prominent equity index in Europe.

Variance futures replicate the pay-off profile of a variance swap using a daily-margined futures contract. Instead of a final settlement payment upon expiry the pay-off profile of a variance swap is calculated as the sum of all variation margin payments through the period the variance futures contract is held.

Variance futures are standardised instruments that are fully fungible and can be traded in a central order book. It is widely expected that a centrally cleared product will increase liquidity and price transparency in the European variance market.

Eurex has developed the new product in collaboration with DRW Innovations, which owns the US patent on the variance futures methodology. Eurex and DRW have reached an agreement that will allow Eurex to use this patent-protected methodology to offer variance futures on the EURO STOXX 50.

”Feedback from clients in the major financial centres of Europe has been exceedingly positive and we believe that a listed variance futures product has the potential to increase the size of the current market. Furthermore, this new product marks another evolution of the Eurex product range in response to client demand and market needs,” says Eurex executive board member Mehtap Dinc.

“We are excited to be working with Eurex and view this as a great opportunity to bring our methodology to the EURO STOXX 50,” says Don Wilson, founder and CEO of DRW. “We feel this product will thrive in the European markets, offering greater liquidity and price transparency as well as easier access to centralised clearing.”

Eurex variance futures will be available at maturities between one and 24 months and will be tradable from 9am to 5.30pm CET.

Variance futures will be traded on-exchange in terms of notional vega at volatility strikes. Upon matching notional vega and volatility strikes will be converted into variance futures at variance futures prices, according to Eurex. The conversion formulae and parameters will be published.

Minimum order size will be 1 notional Vega and minimum price change will be 0.05 volatility points.